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Cactus
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Posts: 16
Joined: January 13th, 2004, 5:08 pm

Market Vol, Vol trading and Non Farm Payrolls...

April 3rd, 2004, 9:32 am

Hi, as a young structurer newly arrived in in London I was excited seeing the large mrtk move following the Friday's data, with the Bund falling 1.50 figures.....So i went to a trader I knew was long volatility and started asking him about his vigorous P&L.... But he started shouting at me....Back to my seat i saw the broker lowered the quoted (yield) vols, so the trader was losing a large amount of money (vega*change in the page of the yield vols), even if, as i computed later, the normalised vols (yield*atm rates) were leaved pretty unchanged.....Why a trader long vega loses money witha very big market movement? The normalised vols were unchanged, and these vols are usually (research by oter banks, trading stategies etc...)used to represent market volatility..but the P&L is computed using yield vols!....Cactus
 
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Ariston
Posts: 59
Joined: August 20th, 2001, 4:56 pm

Market Vol, Vol trading and Non Farm Payrolls...

April 3rd, 2004, 12:58 pm

Can be summed up in two words: volatility frown.
 
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Cactus
Topic Author
Posts: 16
Joined: January 13th, 2004, 5:08 pm

Market Vol, Vol trading and Non Farm Payrolls...

April 4th, 2004, 1:14 pm

So, if a volatility frown exist in the Fixed income market, being long vega= long the market, while being short vega=short the market. That's why yield vols rise when market goes up , while yield vols fall when the market goes down, that keeping basis point vols constant. Is that correct?
 
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NorthernJohn
Posts: 632
Joined: June 2nd, 2003, 9:07 am

Market Vol, Vol trading and Non Farm Payrolls...

April 4th, 2004, 5:13 pm

QuoteOriginally posted by: CactusHi, as a young structurer newly arrived in in London I was excited seeing the large mrtk move following the Friday's data, with the Bund falling 1.50 figures.....So i went to a trader I knew was long volatility and started asking him about his vigorous P&L.... But he started shouting at me....Back to my seat i saw the broker lowered the quoted (yield) vols, so the trader was losing a large amount of money (vega*change in the page of the yield vols), even if, as i computed later, the normalised vols (yield*atm rates) were leaved pretty unchanged.....Why a trader long vega loses money witha very big market movement? The normalised vols were unchanged, and these vols are usually (research by oter banks, trading stategies etc...)used to represent market volatility..but the P&L is computed using yield vols!....CactusThere is not any one consistent system between banks for how vols, and vega P+Ls are quoted. The sustem he had was effectively making him long delta, which is where the loss came from.It is probably better to look at vega and delta from the viewpoint of vols being normal locally, and to hedge to this. His delta probably had a vega component in it which it should not have.It is quite striking how badly non-trading staff can time their comments when a trader is having a bad day. I have heard a middle office guy tell a trader about a friend of his, that was so intelligent, and had gone hugely short, when he knows that the trader has just dropped his year's P+L through the market dumping.Even when a big move has gone in someone's favour, they will often be feverishly trying to lock in what they can, or to estimate second order effects, or what their new positions are, and so will not appreciate someone attempting to engage them in conversation until after the day is over.People get very personally involved in their books. We can become quite irrational when things are kicking off in a big way.
 
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abumazen
Posts: 787
Joined: September 10th, 2003, 7:37 pm

Market Vol, Vol trading and Non Farm Payrolls...

April 4th, 2004, 11:50 pm

Aw, he just needs some cheering up. Email him a copy of this picture:MP
 
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Martinghoul
Posts: 3256
Joined: July 18th, 2006, 5:49 am

Market Vol, Vol trading and Non Farm Payrolls...

August 3rd, 2007, 6:55 pm

1) It's the way of the bund, my friend... Locals mark the options in your face sometimes, but c'est la vie...2) Let's say you are long gamma (you bought the ATM straddle). If the mkt moves, you're going to make lots of money from the move, right, 'cause your straddle is now away from the strike (and assuming you delta-hedge it there)? So the trader made lots of money, because his gamma delivered. After it delivered, doesn't it seem intuitive to you that the implied vols should be lower? I mean your implied volatility per-event was pricing in a large amount of Friday uncertainty (payrolls, I assume). The event happened, uncertainty got resolve, so, voila, there's less volatility remaining for the lifetime of the option.3) Forget about the smile for now. Compared to the effect of changes in vol and underlying, it's a secondary effect. You first need to understand the former intuitively.
 
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Gmike2000
Posts: 801
Joined: September 25th, 2003, 9:49 pm

Market Vol, Vol trading and Non Farm Payrolls...

August 6th, 2007, 6:35 pm

the issue is maybe implied vs realized volthe underlying (realized) vol was high immediately following the NFP number. but implieds tend to fall right after such an announcement. another reason could be that he was long vol somewhere else on the vol surface. what you saw on the screen with the bund moving was short term vol, or gamma. the trader could be long vega (long term vol) and short gamma. in any case, do not try to chit chat with a trader right after or before NFP. this is just simply the most stressful of all economic announcements and it makes even nice traders (i consider myself among those) completely agitated and highly aggressive.